Business Systems Modernization: IRS Has Satisfied Congressional Direction
on the Custodial Accounting Project (Correspondence, 03/16/2001,
GAO/GAO-01-444R).
As part of its business systems modernization program, the Internal
Revenue Service (IRS) is acquiring a system known as the Custodial
Accounting Project (CAP). In September 2000, Congress directed that IRS
limit its spending on CAP until it provided a compelling business case
for investing in this project and started managing CAP as an integrated
part of the business systems modernization program. GAO found that IRS
has satisfied both of these directives. However, its business case
guidance does not explicitly specify cost-effectiveness analyses as a
means for economically justifying proposed investments and define when
and how these analyses should be prepared. As a result, IRS runs the
risk of spending time and money developing future business cases for
proposed system solutions that, like CAP, cannot be adequately justified
on the basis of costs and benefits alone.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GAO-01-444R
TITLE: Business Systems Modernization: IRS Has Satisfied
Congressional Direction on the Custodial Accounting
Project
DATE: 03/16/2001
SUBJECT: Cost effectiveness analysis
Systems conversions
Information resources management
Tax administration systems
Financial management
Systems design
IDENTIFIER: IRS Custodial Accounting Project
IRS Enterprise Life Cycle
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GAO-01-444R
IRS' Custodial Accounting Project
United States General Accounting Office Washington, DC 20548
March 16, 2001 The Honorable Ben Nighthorse Campbell Chairman The Honorable
Byron L. Dorgan Ranking Member Subcommittee on Treasury and General
Government Committee on Appropriations United States Senate
The Honorable Ernest J. Istook, Jr. Chairman Subcommittee on Treasury,
Postal Service and General Government Committee on Appropriations House of
Representatives
Subject: Business Systems Modernization: IRS Has Satisfied Congressional
Direction on the Custodial Accounting Project
As part of its business systems modernization program, 1 IRS is acquiring a
system known as the Custodial Accounting Project (CAP). It is intended to
provide IRS with a single, corporate data repository of taxpayer accounts
and related tax revenue accounting and reporting capabilities.
In September 28, 2000, correspondence to IRS, you directed the agency to
limit further spending on CAP until IRS (1) provided a compelling business
case for investing in this project and (2) started managing CAP as an
integrated part of the business systems modernization program. You
subsequently requested that we assess IRS' actions to satisfy your
direction. As agreed with your offices, our objectives were to determine
whether (1) the CAP business case that IRS submitted to your offices on
November 14, 2000, adequately justifies IRS' plans for investing in the
system and (2) IRS has implemented management controls for integrating CAP
into its business systems modernization program.
In sum, IRS has satisfied both of your directives. IRS can, however, improve
its business case guidance in light of its experience in justifying its
investment in CAP, and we are making recommendations to the Commissioner of
Internal Revenue for doing so. (See the enclosure for details on our scope
and methodology.) In its oral
1 Formerly called tax systems modernization.
GAO- 01- 444R IRS' Custodial Accounting Project Page 2 comments on a draft
of this letter, which are discussed in the “Agency Comments”
section, IRS agreed with our conclusions and recommendations.
Background
IRS' business systems modernization program includes three major categories
of projects--( 1) tax administration systems (i. e., systems that are to
support IRS' prefiling, filing, and postfiling taxpayer service core
business areas), (2) administrative/ internal management systems (i. e.,
systems that are to support IRS functions such as financial management and
human capital management), and (3) infrastructure systems (i. e., operating
platforms, system software, network management, and security).
IRS is in the process of reengineering its administrative/ internal
management processes, such as how it manages (1) taxpayer accounts and tax
payments (including reconciling taxpayer account files with tax payment
files), (2) internal IRS assets (e. g., property and facilities), and (3)
human capital. Of these three efforts, IRS is further along with the first,
which includes the processes that CAP is to automate and support. The
definition of the full complement of reengineered administrative/ internal
management functions is to be completed in April 2001.
CAP is expected to provide a single data repository of taxpayer accounts and
tax payments. IRS also plans for CAP to, among other things, automatically
reconcile accounts and payments, post updates to IRS' general ledger, and
produce revenue accounting reports. To do so, CAP is being designed to
receive taxpayer account and payment information from either IRS legacy or
modernized tax administration database systems as well as from four systems
operated by federal agencies, such as Treasury's Financial Management
Service, that collect tax payments on IRS' behalf. This information will
form IRS' taxpayer account subledger and its collections (taxpayer payments
) subledger and, once processed by CAP, will be posted to IRS' general
ledger. (See figure 1 for a simplified diagram of CAP functions.)
Currently, CAP is in the detailed system design and development phase and is
to be deployed starting in spring 2003. According to IRS, the cost of
acquiring CAP and operating and maintaining the system over its expected 10-
year life is estimated to be $150 million. As of December 31, 2000, IRS
reports it has spent almost $9 million on CAP. 2 When other IRS projects
that have evolved into CAP are included, however, the total is about $24
million. 3
2 Per IRS, the source of CAP funding is the Information Technology
Investments Account. 3 The other projects are the Financial Reporting
Release project and the Payment Information Database project. IRS reported
that during fiscal years 1998, 1999, and 2000, it spent approximately $14.8
million from its information systems budget on these projects.
GAO- 01- 444R IRS' Custodial Accounting Project Page 3
Figure 1: Simplified Diagram of CAP
*CFO = Chief Financial Officer
In September 22, 2000, briefings and a subsequent report, 4 we provided your
offices with the results of our review of IRS' August 2000 interim
modernization spending plan. This interim plan requested about $33 million
from IRS' Information Technology Investments Account 5 as a
“stopgap” measure until IRS could submit its third expenditure
plan. 6 Of the $33 million requested, about $4 million was for CAP.
4 Tax Systems Modernization: Results of Review of IRS' August 2000 Interim
Spending Plan (GAO- 01- 91, November 8, 2000). 5 The Information Technology
Investments Account is a multiyear capital account-- established by the
Congress via the Department of the Treasury's fiscal year 1998 and 1999
appropriations acts (Public Laws 105- 61 and 105- 277, respectively)-- to
fund the replacement of IRS' inefficient and antiquated information
technology systems and ultimately improve service to taxpayers. The
obligation of account funds is limited by the acts until IRS and Treasury
submit to the Congress for approval a proposal for expenditures that, among
other things, (1) implements IRS' enterprise architecture, (2) meets system
investment requirements, (3) is reviewed and approved by IRS' Management
Board and the Office of Management and Budget, and (4) is reviewed by us.
6 In October 2000, IRS submitted the third plan requesting approximately
$200 million of which $44 million was for CAP. We reviewed the plan and on
November 9, 2000, briefed IRS' Senate and House appropriations subcommittees
on our results and issued a subsequent report in January 2001 (see Tax
Systems Modernization: Results of Review of IRS' Third Expenditure Plan
(GAO- 01- 227, January 22, 2001)).
Non- IRS tax payment
systems IRS
tax payment systems
IRS tax account
systems Collections Subledger
Taxpayer Account Subledger CAP
Major function Extracts and stores data from tax receipt and account systems
?Serves as collections subledger and taxpayer subledger
CFO* Database
Major function ?Consolidates taxpayer and collections data to support Agency
performance management ?Serves as input into IRS' Standard General Ledger
IRS' Standard
General Ledger
Reports Major function ?Provide information on revenue activities for
internal and external reporting purposes (CFO uses input from the CFO
database, standard general ledger, and subledgers to produce reports)
GAO- 01- 444R IRS' Custodial Accounting Project Page 4 As part of our
briefings and report on this interim plan, we concluded, among other
things, that IRS (1) had prematurely begun to acquire CAP (i. e., begun
detailed design and development) before it had developed a compelling
business case for doing so and (2) had not effectively integrated CAP with
other modernization projects. Accordingly, we recommended that the
Commissioner of Internal Revenue limit further investment in CAP until IRS
(1) demonstrated sufficient business value for investing in CAP and (2)
reported to its Senate and House appropriations subcommittees on how the
risks associated with CAP not being managed as an integrated part of the
modernization were being mitigated. IRS agreed with these recommendations.
In September 28, 2000, correspondence to IRS, you subsequently restricted
CAP funding until IRS' Chief Financial Officer and Chief Information Officer
(1) certified to you that sufficient business value existed for pursuing CAP
and (2) reported to you on how the lack of CAP integration was being
mitigated. In response, IRS' business systems modernization executive
directed that the CAP project halt further detailed design and development
work, and on November 14, 2000, IRS' Chief Financial Officer and Chief
Information Officer provided the subcommittees with the certification and
associated business case and reported on steps taken to integrate CAP into
the modernization program.
Business Case Provides Sufficient Basis for Planned CAP Investment
Business cases are an essential tool for disciplined investment management,
providing the quantitative and qualitative analytical basis for making
informed investment selection and control decisions and for evaluating
whether investments actually deliver promised business value. Accordingly,
both the Clinger- Cohen Act of 1996 7 and the Office of Management and
Budget 8 (OMB) require business cases for information technology
investments. Moreover, IRS' Enterprise Life Cycle 9 management program also
requires business case justifications at certain project milestones and
includes guidance on their preparation and use. This guidance, developed and
managed by the office of the Chief Financial Officer, specifies that
business cases are to define the benefits and costs of each investment so
decisionmakers can discern which ones deliver benefits that exceed costs.
IRS' business system modernization executive had staff members involved in
acquiring modernized systems trained in the guidance as part of their
training on how to use the Enterprise Life Cycle.
7 Public Law 104- 106, February 10, 1996. 8 OMB Circular A- 94, Guidelines
and Discount Rates for Benefit– Cost Analysis of Federal Programs
(October 29, 1992) and OMB Circular A- 130, Management of Federal
Information Resources (revised November 30, 2000).
9 The Enterprise Life Cycle is IRS' system life cycle management program
that includes the policies, processes, and products for managing information
technology investments from conception, development, and deployment through
maintenance and support.
GAO- 01- 444R IRS' Custodial Accounting Project Page 5 In August 2000, IRS
decided to proceed with its CAP acquisition and in doing so
relied on the CAP business case developed at that time. However, as we
briefed your offices in September 2000 and subsequently reported, 10 this
business case did not provide a compelling justification for investing in
CAP. In particular, the business case reported that the proposed CAP
solution provided a negative net present value. Under IRS' definition, this
meant that the estimated budgetary costs of this system over its expected
10- year life (i. e., costs to acquire, deploy, operate, and maintain)
exceeded the budgetary benefits over the same period by about $110 million
(in present- value terms). 11 In addition, the business case did not provide
an adequate explanation of how CAP was to support IRS operations.
To assist IRS in responding to your direction, we met with IRS modernization
and CAP officials on October 25, 2000, and discussed the CAP business case.
At that time, we stated that IRS' approach of economically justifying CAP
with a business case that was based on a cost/ benefit analysis was not the
most appropriate approach. Specifically, OMB has defined two approaches to
developing cost/ benefit business cases-- one based on analyzing the costs
and benefits of a proposed solution and the other based on analyzing the
relative cost- effectiveness of alternative solutions. According to OMB,
cost- effectiveness analyses are to be used when a policy decision has been
made to perform a given business function or deliver a given service. This
is precisely the impetus for CAP-- namely, to comply with federal financial
management mandates and other requirements. In the case of CAP, IRS'
original business case did not employ a cost- effectiveness approach because
IRS wanted to justify all projects using the cost/ benefit approach, and its
guidance did not explicitly define when and how to use the cost-
effectiveness approach.
Subsequently, IRS revised the CAP business case and transmitted it to you on
November 14, 2000. We reviewed this revised business case and found that it
complied with OMB cost- effectiveness analysis requirements. For example,
OMB requires that cost- effectiveness analyses specify (1) a clear
investment rationale, (2) alternative investment options for addressing the
problem, (3) life cycle costs for each alternative, and (4) process and
decision criteria for selecting among the competing investment options. The
revised CAP business case met all these criteria. In short, IRS described
the necessity to address long- standing financial management weaknesses and
showed how CAP was both an incremental means to this long- term goal and an
essential near- term tool for producing auditable end- of- year custodial
financial statements. IRS also comparatively analyzed CAP against three
alternative system solutions and demonstrated, using such criteria as life
cycle cost, technical risk, and scalability, that no compelling reason
existed to select one of the alternative system solutions.
10 GAO- 01- 91, November 8, 2000. 11 IRS' computation of net present value
takes into account only those benefits and costs that affect IRS' budget.
The most significant benefits of CAP are nonbudgetary and, therefore, not
counted in the net present value.
GAO- 01- 444R IRS' Custodial Accounting Project Page 6 IRS Is Now Applying
Systems Modernization
Management Controls to CAP IRS' business systems modernization is a program
to acquire a system of multiple interrelated and interdependent systems.
Thus, for the modernization to be successful, acquisition of these systems
must be managed in an integrated manner.
As we reported in November 2000, 12 CAP was being managed separately from
other modernization projects. For example, CAP was not incorporated into the
modernization's integrated master schedule, which specifies the projects'
acquisition schedules and other dependencies and serves as a control for
ensuring that related systems interoperate effectively and efficiently and
are delivered in the proper sequence to satisfy system interdependencies. In
addition, CAP was not included in monthly program management review
meetings, which are designed to inform management of, among other things,
how each project is progressing, including how it is managing its
dependencies with other projects.
IRS has since taken steps to align CAP with other modernization projects and
to manage it as an integrated part of the modernization program. For
example, IRS
is in the process of incorporating CAP in the modernization's integrated
master schedule, is planning to include CAP in monthly program management
review meetings starting in March 2001, and has conducted meetings between
CAP staff and those of related modernization projects to plan for
integration among these systems.
Conclusions
IRS has satisfied November 2000 congressional direction on the CAP project.
However, its business case guidance does not explicitly specify cost-
effectiveness analyses as a means for economically justifying proposed
investments and define when and how these analyses should be prepared. As a
result, IRS runs the risk of spending time and money developing future
business cases for proposed system solutions that, like CAP, cannot be
adequately justified on the basis of costs and benefits alone.
Recommendations
We recommend that the Commissioner of Internal Revenue direct the Chief
Financial Officer to revise, consistent with OMB requirements, IRS' business
case guidance to explicitly specify cost- effectiveness analyses as a method
of justifying system investments that meet prescribed criteria.
12 GAO- 01- 91, November 8, 2000.
GAO- 01- 444R IRS' Custodial Accounting Project Page 7 Further, to ensure
that the revised guidance is applied appropriately, we recommend
that the Commissioner direct the Business Systems Modernization Executive to
train modernization staff in its use.
Agency Comments
In oral comments on a draft of this report, the Business Systems
Modernization Deputy Associate Commissioner for Program Planning and Control
stated that IRS concurred with our conclusions and recommendations. This
official also said that IRS plans to revise its business case guidance to
explicitly define when and how to use the cost- effectiveness approach.
- - - - We are sending copies of this report to Senator Max Baucus, Senator
Robert C. Byrd, Senator Kent Conrad, Senator Charles E. Grassley, Senator
Joseph I. Lieberman, Senator Don Nickles, Senator Ted Stevens, and Senator
Fred Thompson, and to Representative Dan Burton, Representative William J.
Coyne, Representative Amo Houghton, Representative David R. Obey,
Representative Charles B. Rangel, Representative William M. Thomas,
Representative Henry A. Waxman, and Representative C. W. Bill Young, in
their capacities as Chairmen, Ranking Members, or Ranking Minority Members
of Senate and House Committees and Subcommittees. We are also sending copies
to the Honorable Charles O. Rossotti, Commissioner of Internal Revenue; the
Honorable Paul H. O'Neill, Secretary of the Treasury; the Honorable Larry R.
Levitan, Chairman of the IRS Oversight Board; and the Honorable Mitchell E.
Daniels Jr., Director of the Office of Management and Budget. The letter
will also be available on GAO's home page at www. gao. gov.
Should you or your staff have questions on matters discussed in this report,
please contact us at (202) 512- 3439 or (202) 512- 9110, respectively, or by
e- mail at hiter@ gao. gov or whitej@ gao. gov. Major contributors to this
report included Harold Brumm, Gary Mountjoy, Madhav Panwar, Sabine Paul,
Steve Sebastian, Aaron Thorne, Tuyet Quan Thai, and James Wozny.
Randolph C. Hite Director, Information Technology
Systems Issues James R. White
Director, Tax Issues Enclosure
Enclosure GAO- 01- 444R IRS' Custodial Accounting Project Page 8
Scope and Methodology
To assess whether IRS' November 9, 2000, business case provided adequate
basis for investing in CAP, we reviewed applicable OMB criteria-
specifically OMB Circular A- 94 , Guidelines and Discount Rates for
Benefit– Cost Analysis of Federal Programs, which defines key elements
of cost- effectiveness analyses, and OMB Circular A- 130 , Management of
Federal Information Resources, which specifies guidelines for effectively
managing information technology investments. 1 We then analyzed the subject
CAP business case against IRS' business case guidance and OMB requirements
to identify any significant variances. To augment this analysis, we
interviewed senior IRS officials, including the Director of IRS' Business
Systems Modernization Office and the CAP project manager, to determine
rationale and justification behind certain decisions central to the business
case, such as the identification of alternative system solutions. We did not
independently validate the cost data cited in the business case.
To assess IRS efforts to implement management controls for integrating CAP
with business system modernization, we focused on the following systems
modernization management controls: IRS' integrated master schedule, program
management review meetings, and the use of Enterprise Life Cycle
requirements for CAP. Specifically, we reviewed an updated integrated master
schedule, attended program management review meetings to witness the
integration of CAP into modernization program decisionmaking, and reviewed
CAP life cycle documentation and compared it to Enterprise Life Cycle
requirements.
We performed our work in Washington, D. C., from November 2000 through
February 2001, in accordance with generally accepted government auditing
standards.
(512005) 1 OMB Circular A- 94, Guidelines and Discount Rates for
Benefit– Cost Analysis of Federal Programs (October 29, 1992) and OMB
Circular A- 130, Management of Federal Information Resources (revised
November 30, 2000).
*** End of document. ***